BofA Analyst Bullish On Canopy Growth-Acreage Merger: It Could Bring Canopy Into The U.S.

Canadian cannabis giant Canopy Growth Corp CGC revealed in April that it was contemplating a deal to acquire multi-state operator Acreage Holdings, Inc. ACRG ACRDF in a $3.4 billion deal, thus making it one of the largest cross-border cannabis mergers in the industry’s history

The acquisition would also open the market up to Canopy, in that Acreage is among the largest cannabis companies in the U.S., operating across 19 states. Furthermore, Canopy had already experienced challenges with U.S. regulations when seeking to merge or invest in American cannabis businesses. 

Acreage, meanwhile, reported Monday its first-quarter unaudited earnings with revenue of $38.4 million, up by 58% year-over-year, and 22% sequentially. The New York-based company also achieved a positive adjusted EBITDA of $1.6 million, which compares to an adjusted EBITDA loss of $12.4 million in the same quarter of 2020.

The quarterly net loss was of $7.8 million, versus a loss of $172 million in the corresponding period of the prior year.

The Analyst

Following the newest earning report, BofA’s analyst Heather Balsky restated their “Buy” rating on Canopy’s stock with a price target of $36.

The Thesis

While some investors don’t see the merger idea as a good move for Canopy, being worried about the Acreage’s “historically weak profitability,” Balsky said the operator’s positive Q1 EBITDA could help remove some concerns.

“In C20, US peers posted a 20% average EBITDA margin, while Acreage reported a (23)% margin,” noted the analyst, explaining that the company’s balance sheet, leadership team and partnership could well direct Canopy’s entrance into the U.S. if there is federal legalization.

What’s more Canopy’s advancing EBITDA and cash flow should also “make its shares attractive.”

Acreage’s first-quarter earnings were unfavorably affected by its activities in Oregon, which the company’s plans to exit. The management projected sequential EBITDA advancement on similar strategic market exits, and recreational legalization in crucial states, like New York and New Jersey.

“In our view, the current stock price does not fully value its long-term potential. We think US legalization will take more than a year, but Canopy's improving EBITDA and cash flow make its shares attractive in the meantime,” Balsky concluded.

The Price Action

Canopy’s shares were trading 2.19% lower at $22.40 at the time of writing.